Baker Hughes Incorporated (NYSE: BHI)
shares were surging higher early Monday following an official
announcement of a deal with General Electric Company (NYSE: GE). While the merger/spinoff deal is certainly good news for Baker Hughes
shareholders, the terms of the deal are far from the typical buyout. GE will be combining its oil & gas segment with Baker Hughes
and then spinning off the combined assets into a brand new oil services juggernaut. Here’s a look at exactly what Baker Hughes
shareholders are getting.
First, Baker Hughes shareholders will receive $17.50 per share in cash. In addition, they will get a 37.5 percent stake in the
newly-formed company. In the press release out
Monday morning, GE said it expects the combined company will generate $32 billion in combined revenue per year.
In 2015, Baker Hughes generated just shy of $16 billion in
revenue.
In other words, Baker Hughes shareholders will get $17.50 per share of cash plus a 37.5 percent stake in a new company that is
about twice the size of Baker Hughes today.
Using Friday’s closing price as a guide, a 37.5 percent stake in a company with a market cap twice the size of Baker Hughes
suggests around $44 in equity per current Baker Hughes share. If you tack on the $17.50 in cash, that makes the deal worth right
around $61.50/share. Baker Hughes shares opened Monday’s trading session at almost exactly the $61.50 level.
Of course, these numbers don’t include any synergy benefits, which could be significant.
There is also a certain amount of risk the deal will get blocked by regulators.
Halliburton Company (NYSE: HAL)’s proposed
buyout of Baker Hughes was eventually dropped after the deal ran into significant regulatory resistance.
Halliburton and Baker Hughes combined generated roughly $40 billion in revenue in 2015. However, Halliburton’s buyout of Baker
Hughes would have eliminated the third-largest competitor in the oil services market, whereas the GE/Baker Hughes deal potentially
creates a brand new major competitor for Halliburton and Schlumberger Limited. (NYSE: SLB).
Despite the morning's run, at last check, Baker Hughes was down 5.99 percent at $55.59. GE was up 0.36 percent at $29.33.
Disclosure: The author is long BHI, SLB and HAL.
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